Advanced Diploma of Financial Planning (ADFP) Practice Test

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Prepare for the Advanced Diploma of Financial Planning Test. Study with flashcards and multiple choice questions, receive explanations for each answer. Get exam-ready now!

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Growth stocks are characterized by which of the following?

Stable sales and earnings
Sales, earnings, and market shares growing at rates equal to the economy
Rapid growth exceeding the general economic growth rate
Low market performance over time

The correct answer is: Rapid growth exceeding the general economic growth rate

Growth stocks are indeed characterized by rapid growth that exceeds the general economic growth rate. These stocks typically belong to companies that are expected to grow at an above-average rate compared to their industry or the overall market. Investors are often attracted to growth stocks not just because of their current earnings, but primarily due to the future potential they possess, which can lead to substantial capital appreciation over time. Such companies often reinvest their earnings into expanding operations, developing new products, or entering new markets, rather than paying dividends to shareholders. This reinvestment strategy is what drives their growth at rates higher than the general economy. As a result, growth stocks are often viewed as higher-risk investments, given their reliance on continued growth in earnings and sales for increased share price. Other options, such as stable sales and earnings or growth rates equal to the economy, do not align with the defining characteristics of growth stocks, which are all about significant upward momentum. Low market performance over time contradicts the expected appeal of growth stocks, as investors seek appreciation rather than stagnation.